AA - 2020

Author: John Loos
Property Strategist FNB Commercial Property Finance
2 November 2020


The commercial property-driven corporate mortgage advances growth rate has significantly outpaced the strongly residential driven household mortgage advances category since early 2014. However, the strong recent divergence in strength between the now relatively strong residential property market and the weaker commercial property market may see household mortgage advances become the relative ‘outperformer’ in the near term.

Last week’s release of the SARB credit data for September began to reflect early signs of the changed relative strength of the residential versus commercial property markets in the recent months.

FNB looks at corporate / commercial sector mortgage advances growth, dominated by commercial property-related mortgage lending and, household sector mortgage advances which are dominated by residential-related mortgage lending.

Since early 2014, corporate mortgage advances growth has been significantly stronger than household sector mortgage advances growth, the latter having been muted in the aftermath of the pre-2008 housing bubble and all of its extreme lending growth while the commercial property market has remained relatively ‘solid’.

In response to the pandemic and the severe impact on economic growth and the subduing of inflationary pressures, the SARB cut interest rates aggressively by 3 percentage points.

The household-driven residential property market responds strongly to changes in the cost of credit, while the commercial property market’s participants are more focused on the state of the economy – which is still very week albeit recovering partially.

The result is two different markets: commercial property in the relative doldrums and residential property almost surprisingly strong. Examining the corporate / commercial sector versus household mortgage advances, we are just beginning to see their trends reflect the divergence in strength in the two major property markets.

Corporate mortgage advances growth is far stronger, having recorded 7.7% year-on-year growth in September whereas household mortgage advances growth was a far slower 3.1%.

However, corporate mortgage advances growth continued to slow from an April high of 10.3% and further from 8.3% in the prior month of August. By comparison, the household mortgage advances category’s September growth rate was also slower than its 5% year-on-year rate of April (the start of lockdown) but it has started to accelerate from a 2.9% low as of July.

Growth in mortgage advances outstanding typically lags trends in new mortgage lending, the former being driven not only new lending trends but also by trends in existing loans being paid down or cancelled.

Despite widespread evidence of the residential property market being far stronger than the commercial property market, this household mortgage advances growth acceleration has been small to date, and its growth is still slower than the more commercial property-related corporate / commercial sector mortgage advances growth rate.

FNB’s surveys suggest that household mortgage advances growth may become the relative outperformer in the near term.

Examining the various FNB Property Broker/Estate Agent Surveys, the strongly divergent activity levels between the major property markets point to the likelihood that corporate mortgage advances growth will continue to slow in the near term, and its growth may well be overtaken by an accelerating household mortgage category.

The FNB Property Broker and Estate Agent Surveys ask respondents for their perceptions of market activity on a scale of 1 to 10, 10 being the strongest level of activity.

The sharp interest rate cutting has led to a sharp resurgence in perceived residential activity, whose third quarter survey activity rating measured a very strong 6.86, while the post-lockdown levels for the three major commercial property segments remained far more muted at 4.64 for industrial, 3.37 for retail and 2.97 for office property.

This leads to the possibility that household hector mortgage advances growth may begin to outpace corporate mortgage advances growth in the near term, something that has hardly ever happened since early 2014.

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